Litigation: When a settlement is worse than a bad trial result

Somewhere in the “Ancient Book of Trial Lawyer Truths” is the precept that a bad settlement is better than a bad trial result. But over time, this truism has been pushed well beyond itsintent to the practice we seem to have now—the infinitely absurd notion that a settlement is the only result. According to the 2009 book “The Death of the American Trial” by Northwestern University law professor Robert Burns, the number of federal civil cases ending in trials has declined from 11.5 percent in 1962 to just 1.2 percent in 2002.

While the consequences on the civil side are dire, the same kind of thinking is destroying even more important principles on the criminal side. As Supreme Court Justice Anthony Kennedy noted in a recent majority ruling that expanded the right of a criminal defendant to effective counsel not only in trial but also in plea bargaining, 97 percent of federal criminal convictions and 94 percent of state criminal convictions are the results of guilty pleas. He went on to say that “in today’s criminal justice system, the negotiation of a plea bargain, rather than the unfolding of a trial is almost always the critical point for a defendant.” It is all too frequently the case that defendants plead guilty and accept prison terms in cases where they are in fact innocent. In these cases, the consequences of a conviction through trial would be so much greater than the “plea bargain” that they feel compelled to accept the “deal”.

The virtually unanimous wisdom today is that settlements are less costly, less time-consuming and less of a headache overall. In the economic climate in which we live, settlements are an easy sell. But if you believe that the true purpose of any legal action is to find justice, then the settlement call is not always the right one. In many cases, the settle-at-all-costs mentality has become a knee-jerk reaction that fails to take into account the true cost of a settlement and the actual positive value of a trial. We need to revive the even more fundamental principle of our justice system: that the outcome of a trial is justice and everything else is simply an effort to approximate the result of a well-functioning judicial system.

The justice system is complex. Interests of litigants, lawyers, judges and juries, not to mention insurance companies and the public’s values are directly implicated. And, settlement decisions should not and cannot be reduced to formulas. The go or no-go trial decision is a complex one that requires careful and continued evaluation of all these factors as well as experience, judgment and often nerve. To be clear, settlements are a perfectly legal and viable solution to legal challenges. There are situations when they are completely appropriate. The key is to look beyond the economic stakes and consider more fully the broader context of what a trial or settlement will mean. Here are three basic scenarios describing when the decision to make a good settlement may prove to be worse than a bad trial result.

When reputation is at stake

Ben Franklin once said, “It takes many good deeds to build a reputation, and only one bad one to lose it.”We know that in the eyes of the public, a defendant that agrees to any type of settlement will be perceived as guilty. Settling a case where customers were harmed because of an alleged faulty product or practice can irreversibly erode client and customer confidence. High-profile litigation can mean far more to a company’s reputation than can be measured in the dollars exchanged. Often even a short-term hit in trial and litigation costs can balance the gain in long-term reputation protection. While some settlements include stipulations that shield the defendant from admitting fault or wrongdoing, perception is reality.

When a precedent is set

Whether a lawsuit is settled out of court or goes to trial, it can set a precedent –even if it’s not a legal one. A willingness to settle with one person welcomes similar lawsuits from others. That means, over the long term, a settlement might not be the best financial decision. If you believe your company is on the winning side of an argument, going to court can set a precedent that will reverberate for years to come by creating a reputation of a company willing to defend itself. Winning a case can eliminate years of future settlements and an image of a company so willing to settle that it invites lawsuits.

When the financial outcome is better

Making the assumption that a settlement will save you money can often be shortsighted or worse—it could actually cost you money. In reality, it depends on the case. According to a 2008 study from consulting firm DecisionSet examining more than 2000 legal cases from 2002-2005, when plaintiffs refuse to take settlements and go to trial, 61 percent get less money than what they were initially offered. This should encourage defendants that are considering a settlement to forgo it and take their chances in the courtroom, or at least offer a low settlement amount. While companies must factor legal costs into this decision, having a trial lawyer who understands the economics of your particular case should allow you to make a careful cost analysis.

Conclusion

There are many other factors involved. For one, admittedly, the legal expense is an enormous factor. With the American rule, contingent fee attorneys have few disincentives to press cases to trial. While settlements are not a new strategy in legal cost control, what is new is that they’ve become the de facto solution. Increasingly, it seems that attorneys are giving no consideration to the alternative. With a minimal chance of ever going to trial to prove themselves in front of a jury or pay legal fees, plaintiffs have been empowered to file increasingly frivolous lawsuits with little to no downside. There’s no justice in this. But for many thrust into the legal process, justice has become secondary to convenience and cost savings. It takes a skilled and experienced litigator to recognize the cases that are about more than money. In these cases, the damage to a company’s reputation, sustainability and ultimate bottom line are far more costly than the costs of going to trial.